Entities are omitted from the output with the code above.
The symptom was that &nbsp;
-- which should work with UTF-8 encoding --
did not even get to XSLTProcessor, let alone through it.
After too much hacking I discovered the simple fix:
set substituteEntities to true in the DOMDocument for the XSL file.
That is, replace the loading of the xsl document with

However, this fails when data entries have HTML entity references. (Some database entries may even contain user generated text.) libxml has the pedantic habit of throwing a FATAL error for any undefined entitiy. Solution: hide the entities so libxml doesn't see them.

Note that the method's name is sort of deceiving, because it does not only output XML, but any string that is generated by the processor. It should rather be called transformToString. So if your output method is "text/plain", for example, this is the way to receive the resulting string.

transformToXML, if you have registered PHP functions previously, does indeed attempt to execute these functions when it finds them in a php:function() pseudo-XSL function. It even finds static functions within classes, for instance:

However, in this situation transformToXML does not try to execute "MyClass::MyFunction()". Instead, it executes "myclass:myfunction()". In PHP, since classes and functions are (I think) case-insensitive, this causes no problems.

A problem arises when you are combining these features with the __autoload() feature. So, say I have MyClass.php which contains the MyFunction definition. Generally, if I call MyClass::MyFunction, PHP will pass "MyClass" to __autoload(), and __autoload() will open up "MyClass.php".

What we have just seen, however, means that transformToXML will pass "myclass" to __autoload(), not "MyClass", with the consequence that PHP will try to open "myclass.php", which doesn't exist, instead of "MyClass.php", which does. On case-insensitive operating systems, this is not significant, but on my RedHat server, it is--PHP will give a file not found error.

The only solution I have found is to edit the __autoload() function to look for class names which are used in my XSL files, and manually change them to the correct casing.

Another solution, obviously, is to use all-lowercase class and file names.